American Water Works Company, Inc.

Good morning and welcome to American Water's third quarter 2024 earnings conference call. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. As a reminder, this call is being recorded and is also being webcast with an accompanying slide presentation through the company's investor relations website. The audio webcast archive will be available for one year on American Water's Investor Relations website. I would now like to introduce your host for today's call, Aaron Musgrave, Vice President of Investor Relations. Mr. Musgrave, you may begin.

Thank you, Cindy. Good morning, everyone, and thank you for joining us for today's call. At the end of our prepared remarks, we will open the call for your questions. Let me first go over some safe harbor language. Today, we will be making forward-looking statements that represent our expectations regarding our future performance or other future events. These statements are predictions based on our current expectations, estimates, and assumptions. However, since these statements deal with future events, they are subject to numerous known and unknown risks, uncertainties, and other factors that may cause actual results to be materially different from the results indicated or implied by such statements. Additional information regarding these risks, uncertainties, and factors, as well as a more detailed analysis of our financials and other important information, is provided in the third quarter earnings release and in our September 30th Form 10-Q, each filed yesterday with the SEC. And finally, all statements during this presentation related to earnings and earnings per share referred to diluted earnings and diluted earnings per share. John Griffith, our president, will share highlights of third quarter and year-to-date results and will comment on our 2025 EPS guidance and longer-term targets. David Bowler, our executive vice president and CFO, will discuss our year-to-date financial results in more detail, general rate case updates, our 2025 outlook, and our five-year financing plans. Cheryl Norton, our Executive Vice President and COO, will then discuss our new capital investment plan, including the expected impact of EPA's lead and copper rule improvements, and will conclude with comments on customer affordability and our acquisition outlook. Susan Hardwick, our CEO, will conclude with a look at our compelling investment thesis. After our prepared remarks, we'll then close by answering your questions. With that, I'll turn the call over to American Waters President John Griffith.

Thanks, Erin, and good morning, everyone. Let me start by saying how happy we are to have David in the role of CFO after having served as our deputy CFO and treasurer. You'll hear more from David shortly. And likewise, as we noted last quarter, I'm pleased to hand the business development baton to Cheryl, whose oversight of our state presidents in her role as chief operating officer is key to our business development activities as we continue to drive enhanced focused on origination activities at the state level. Let's turn to slide five, and I'll start by covering some highlights from the third quarter and year-to-date periods. As we announced yesterday, we delivered strong financial results in the third quarter in line with our expectations, adding to an already strong 2024. Earnings were $1.80 per share for the quarter compared to $1.66 for the same period last year. In the first nine months of 2024, earnings were $4.17 per share, compared to $4.03 for the same period last year. Our results reflect the clear execution of our plan in 2024, which David and Cheryl will discuss further. These results give us confidence to affirm our 2024 EPS guidance of $5.25 to $5.30 per share, which, as you recall from last quarter, represents our narrowing of guidance to the top half of the previous guidance range. As a reminder, our 2024 and 2025 EPS guidance ranges include 10 cents per share of incremental interest income from the amendment of the HOS note earlier this year, which is on top of the interest income from the original note terms that we are replacing with earnings from the regulated business. As we've said in the past, repayment of the note is a component of our long-term financing plan as a source of funding for our growth. I also want to highlight that just a few days ago, we closed the $230 million acquisition of the wastewater system assets of Butler Area Sewer Authority in Pennsylvania. Our Pennsylvania team, assisted by the corporate business development team, worked hard to complete this deal, which adds 15,000 customers who we are pleased to begin serving. Turning to slide six, we are initiating our 2025 earnings guidance of $5.65 to $5.75 per share. This represents 8% EPS growth in 2025 compared to our weather normalized 2024 EPS guidance, which David will discuss in further detail. As we roll out our updated five-year plan today, we are affirming our long-term targets, including 7% to 9% EPS and dividend compounded annual growth rates. As a regulated water and wastewater utility, rate-based growth, regulatory and capital execution, and operational excellence are the key drivers of growth for our company. We expect to achieve 8 to 9 percent rate-based growth over the next decade, driven by the accelerated CapEx plan we put forth three years ago to meet reliability, resiliency, and compliance needs. Our rate-based growth includes our regulated acquisition strategy, which drives a growing customer base, as well as the organic revenue growth opportunities we expect from our military services group. Along with our affordability and sustainability leadership, we believe these are the drivers of American Water's very competitive and sustainable shareholder return. In today's closing remarks, Susan will share her thoughts on our position as a premium regulated utility. In closing, on slide 7, I want to emphasize that we expect to achieve consistent EPS growth within the 7% to 9% range through 2029 and beyond. We are demonstrating in 2024 and with our guidance for 2025 that the business plan we set forth following the sale of HOS is strong and compelling. Our commitment to solving problems for our customers remains steadfast, including addressing PFAS, lead and copper, and aging infrastructure among other challenges. No other water and wastewater utility has the combination of the scale, geographic diversity, and expertise that we have. This foundation, coupled with the capital investment needs in our industry, uniquely positions American Water to achieve consistently strong earnings growth for many years to come. One final note before I turn it over to David. As you know, earlier this month, we notified stakeholders of unauthorized activity within our computer networks and systems, which we determined to be the result of a cybersecurity incident. Importantly, none of the company's water or wastewater facilities were impacted by this incident. While the investigation of the incident by a dedicated team of professionals is ongoing, we do not expect that this incident will have a material effect on the company or its financial condition or results of operations. With that, I'll hand it over to David to cover our financial results and plans in further detail. David?

Thanks, John, and good morning, everyone. Before I get started with results, let me first say how excited I am to ascend the role of CFO at American Water and continue my work with this great team. I also look forward to meeting many of you at EEI in a couple weeks. Turning to slide nine, let me provide a few more details on year-to-date results. Consolidated earnings were $4.17 per share, up 14 cents per share compared to the same period in 2023, and up 18 cents per share on a weather normalized basis. As noted, earnings in 2024 were higher by an estimated 7 cents per share as a result of weather in the second and third quarters as compared to 11 cents per share of favorable weather in the second and third quarters of 2023. Excluding the impacts of weather, Revenues increased by 84 cents per share, driven primarily by general rate case outcomes in 2023 and thus far in 2024. And looking at operating costs, O&M was higher by 19 cents per share, driven primarily by employee-related costs and other increases to support growth in the business as we expected. Reduction costs related to fuel, power, and chemicals were also slightly higher compared to this period in 2023. General taxes, which are comprised of property and gross receipts taxes, were higher by $0.06 per share with the increase in property tax tied to the level of capital investment and higher gross receipts tax driven by higher revenue, primarily in New Jersey. Depreciation increased $0.21 per share and long-term financing costs increased $0.28 per share, both as expected in support of our investment growth. The higher long-term financing cost includes interest on the $1 billion convertible note issuance from last June, the $1.4 billion senior note issuance this February, as well as $0.07 of dilution from last year's equity issuance. And finally, we had $0.07 per share of additional interest income from the February 2024 amendment of the seller note related to the sale of homeowner services. As we've stated, we will continue to break this out quarterly so investors can track the ongoing growth of American Water from its core regulated strategy without this additional interest income. I will also note in appendix you will find details on the third quarter EPS, which has many of the same drivers as the year-to-date results. On slide 10, I will review the latest regulatory activity in our states. First, on completed cases. we received an order from the New Jersey Commission in September approving without modification our settlement agreement of an additional $80 million in annualized revenues that was effective September 15th. The Commission again approved an allowed return on equity of 9.6% and an equity layer of 55%. New Jersey continues to be a constructive state that is supportive of investment to serve our customers well. Turning to active cases, you can see we have general rate cases in progress in seven jurisdictions. These cases are centered around the capital investments we have made and will continue to make in these states. In Missouri, we originally filed a rate case with a proposal for a full future test year, which the Commission declined to accept at this time. However, the Commission provided an allowance for discrete adjustments that recognizes investments through May 2025. While not the ruling we wanted in this case, we are encouraged by the conversations we've had with the Commission and are continuing to work on a legislative path for a future test year in Missouri. Otherwise, our case in Missouri is progressing as expected. In Illinois, we received a proposed decision from the Administrative Law Judge on October 24th recommending a 9.84% return on equity and a 49% equity layer. Final order in this case is expected no later than December 17th, with new rates implemented January 1, 2025. In Virginia, on September 20th, we filed a black box settlement with the Virginia Commission, which agreed to a $15 million annualized increase in revenues compared to our ask of $20 million. The settlement stipulation also specified a return on equity of 9.7%, which matches the current allowed return, and a capital structure with an equity component of 45.67%, which compares to the current approved cap structure of 40.73%. The settlement remains subject to commission, review, and approval. In California, we expect a final rate case decision on December 5th, with new rates retroactive to January 1, 2024. As a reminder, we reached a partial settlement agreement in November 2023 with the CPUC's Public Advocate's Office that would address our revenue requirement request, but did not address rate design or certain other matters, including our request for continuation of a revenue stabilization mechanism. Decoupling is a critical tool for conservation efforts in California as it supports reliability and protection of water supply which will help shape the future economic and environmental health of the communities we serve there. Once we receive the order later this year, we will determine whether we need to pursue further recourse in the state related to the . On slide 11, we provide some considerations regarding our outlook for 2025 results and our newly established EPS guidance range of $5.65 to $5.75 per share. First, as you would expect, our growth will be driven by the returns on the capital invested to serve our customers. Cheryl will walk you through how our capital investment has grown and the specifics of the plan included in this update. As we talked about previously, 2024 is year three of our accelerated capital plan following the 2021 HOS sell. So we see that ramp up partially reflected in earnings in 2025, both from base rate cases and infrastructure mechanisms. Recent regulated acquisitions that are being incorporated into active or just completed rate cases will also drive growth next year. Also critical to our growth strategy is our ability to prudently manage the operating costs it takes to serve our customers. While we continue to have a strong culture of operating efficiencies and cost management, we do expect O&M increases in 2025 from higher production costs, including purchased water, fuel, and power, annual wage increases, as well as additional costs to serve our customers from recent acquisitions. The focus on operating cost efficiencies goes to the heart of the customer affordability construct we want to protect, which is closely aligned with the interests of regulators and ultimately investors in managing affordability of customer bills. The increases in general taxes, depreciation, and long-term financing are driven by the continued capital investments in the system. And while I'm not called out on this slide, I'd like to note that our military services group still adds incrementally to our earnings growth expectation as shown in our growth outlook. MSC's great work on 18 military installations it serves has built trust and resulted in the U.S. government allocating additional funds for improvement projects driving increased revenues. Turning to slide 12, I will provide a look at our balance sheet and liquidity profile before closing with our five-year financing plan update. Our total debt-to-capital ratio as of September 30th, net of $127 million of cash on hand remains at 56%, which is well within our target of less than 60%. Our expected dividend payout ratio for 2024 of 58% is also within our target range of 55% to 60%. I want to affirm that investors can expect our company to continue to be focused on these targets over the long term. With our continued focus on maintaining a strong balance sheet, we also remain confident that we will have access to capital for the foreseeable future. In fact, we just extended the maturity of our revolving credit facility, which has a capacity of $2.75 billion by one year to October 2029. Our diversified banking relationships with some of the largest and strongest banks in In the world, coupled with our fully regulated business model and strong credit ratings, gives us great confidence around our liquidity. In addition, our laddered approach to long-term debt financing over the years has been very important in environments like the current one in managing cash flows and minimizing interest rate risk, which contributes to managing customer affordability. And our short duration between general rate cases driven by our investment allows us to minimize the lag we may experience related to recovery of financing costs. From this position of balance sheet strength, let's turn to slide 13 for a review of our five-year financing plan that will fund the increased capital plan. In our prior five-year plan covering 2024 to 2028, we expected a total of $1 billion of equity financing in the middle of that plan. That amount in timing remains unchanged. Our updated financing plan, now covering 2025 to 2029, includes an estimated total of $2.5 billion of external equity issuances, with the additional $1.5 billion expected near the end of the plan, and all, of course, subject to market conditions. The level and timing of anticipated external equity is tied very simply to our need to fund growth and maintain our strong financial position. Investors should expect equity financing to occur routinely as determined by our investment program, rate case cycle, and as appropriate to maintain our strong balance sheet and credit metrics. Since we're already in alignment with our targets for debt to cap and dividend payout, we have the flexibility to adjust these plans and respond to market conditions when they change for the benefit of customers and investors alike. Finally, I'll wrap up noting that our current financing plan for calendar year 2025 includes $1.5 to $2 billion of long-term debt financing and no equity financing. With that, I'll turn it over to Cheryl to talk more about our five-year capital plan, our recent acquisition activity and outlook, and affordability. Cheryl?

Thanks, David, and good morning, everyone. On slide 15, I'll start with the discussion of our current long-term capital plan. For 2025, we expect our investment spending level to be $3.3 billion. From 2025 to 2029, we expect to invest $17 to $18 billion, an increase of about $1 billion over our previous five-year plan. This level of spending reflects the result of our consistent risk-based project planning. Along with risk, customer affordability is a key variable in our analysis, which I'll speak more about shortly. The increase in the current plan compared to last year is a combination of increased spending to meet compliance requirements for EPA's lead and copper rule improvements, or LCRI, and rolling the plan forward a year. As you are aware, in October, the EPA issued the final LCRI, which sets a deadline near the end of 2037 for lead replacement by water utility providers for assets under their control, among other stipulations. American Water consistently meets water quality standards related to lead and copper rules across our footprint and we are supportive of new or revised water quality standards such as LCRI. Removing the risk of lead service lines over time is absolutely the right thing to do for the health and safety of our customers. We are now expecting to spend about $1 billion over the next five years related to LCRI or about twice the rate of our recent annual spending and we are still planning to invest approximately $1 billion in capital to comply with EPA's PFAS rule. In total, looking out over the next decade, we expect to invest about $40 to $42 billion in our regulated systems and acquisitions, which is $5 billion higher than the previous 10-year plan. One of our key initiatives with this higher level of investment is the expansion of our infrastructure renewal and replacement programs. I want to finish this slide by acknowledging that our teams have done a great job executing our accelerated capital investment plans these last few years. We have consistently met our capital deployment goal each year, and we're on pace to do it again by spending $3.3 billion this year, which includes acquisition investments. These investments are crucial to continuing to deliver safe and clean water and ensure continued reliability of service to our customers. On slide 16, I want to emphasize that timely capital recovery, which for us covers about 75 percent of our capital investments, is foundational to promoting consistently excellent customer service and affordability. Investing in needed infrastructure on a continuous basis drives consistency of reliability of our services and of water quality. It also enables us to mitigate the size of general rate increases for our customers, which helps promote affordable monthly bills. And by reducing regulatory lag, timely capital recovery allows us to more closely earn our lab return and better deliver consistent earnings growth. The pie chart on the right side of the page shows the breakdown of our capital spend by purpose over the next decade. While the vast majority of our capital is dedicated to basic replacement of aging pipes, we are also focused on fortifying our systems through resilient spending and preparing our systems for environmental compliance, through investments in water quality. For example, we've recently invested $9 million in Sheridan, Indiana, to help solve the community's sewer overflow issues that had restricted the community from growing due to EPA noncompliance. And in Hopewell, Virginia, we constructed a 2.5 million gallon storage tank to support proper water storage capacity. We have dozens of stories just like this that demonstrate the vital need for the capital investments we're making. And as we approach the 50th anniversary of the Safe Drinking Water Act later this year, we know there is still much work to be done in our country and that our expertise in helping communities solve their drinking water issues will be needed for decades to come. Turning to slide 17, you can see that we expect these capital investments in infrastructure and in acquisitions will grow regulated rate-based at a long-term rate of 8% to 9%. Rate-based growth, of course, will drive earnings growth. We believe the higher degree of visibility to our capital investment plan, combined with the low-risk nature of the plan, uniquely positions American Water in the utility sector and is fundamental to our investment thesis. Turning to slide 18, where I'll cover customer affordability, we remain very focused on balancing customer affordability and the magnitude of the necessary investments in our plans. As I mentioned previously, Customer affordability is a key variable in our annual capital planning analysis. We once again believe that the average residential water bill across our footprint as a percentage of median household income will continue to be below 1% throughout our five-year plan. Another recent example of the affordability programs we offer is in Pennsylvania. Pennsylvania American Water expanded its H2O Help to Others discount program to customers with an income of up to 200% of the federal poverty level, up from 150% of that level. This change will expand discounted service to an additional 55,000 Pennsylvania American Water customers. We also expanded the H2O Help to Others grant program for customers up to 250% of the federal poverty level, from 200%. Of note, as part of its acquisition of BASA, Pennsylvania American Water already committed to increase its shareholder contribution to the H2O Help to Others grant program by $3.5 million over five years, which will assist more customers through this important affordability program. Turning to our discussion of growth through acquisitions, let me first say that I'm excited to lead our growing business development teams at the state and corporate level. On slide 19, you'll see that we have successfully closed on six systems, totaling $349 million through October 30th, which added almost 50,000 new customers so far this year. Included in this total, as John mentioned earlier, is the big news in Pennsylvania from just a few days ago that we closed on the Butler Area Sewer Authority wastewater system acquisition for $230 million. We remain very confident in our Pennsylvania acquisition pipeline and our ability to grow there. Looking ahead, we also continue to be well-positioned for strong growth through acquisitions across many states, with 43,400 customer connections totaling $169 million under agreement as of yesterday. Two quick highlights there. We have received commission approval of the acquisition of the Silver Creek, Indiana water system and expect to close on it very soon. And in Maryland, we received commission approval in our first fair market value acquisition in the state, and we look forward to serving the former Severn Water Company customers. As we've mentioned, over the last 18 to 24 months, we have invested more resources and added personnel to our business development teams and are starting to see that investment bear fruit with increased opportunities across our footprint. This expanded team, along with a more focused process for deal origination, is driving a larger pipeline of potential acquisitions. now over 1.5 million connections compared to the previous pipeline of 1.3 million customers. With that, I'll turn it over to Susan for some closing thoughts. Susan?

Thanks, Cheryl, and I'm happy to be batting cleanup for us here today. You've heard from John, David, and Cheryl a recap of our long-term strategy, and it should sound very consistent. Beyond our words, though, we have a proven track record of execution on our plans, including achieving our EPS guidance year after year. I fully expect 2025 to be another successful year demonstrating consistent execution of our plans. Slide 21 is a compilation of the unique competitive advantages that we have at American Water that make us stand out as a premium utility. I've been on all sides of the regulated utility industry in the U.S. throughout my 40-year career, gas, electric, and now water and wastewater. I know very well that there are some other great companies in the utility industry that ones that can cite three, four, or maybe more of these qualities on their own resume. But what makes American Water unique from all of the others, though, in my opinion, is the collection of all of these attributes in a single investment opportunity. Let me be specific and call out just a few of these key attributes. American Water, without any dispute, is a top-tier performer on earnings and dividend growth. We have a geographic and resulting regulatory diversity that is rivaled by few. That diversity reduces risk, period. And speaking of risk, our capital plan is low risk on a number of measures like decades of need and basic infrastructure renewal at the core of our plan. Our investment appeal based on our company's mission, values, and these distinguishing fundamentals is compelling. Our mission is to provide safe, clean, reliable, and affordable services to the customers we are privileged to serve, and to those that we hope to serve in the future that today are in need of the services we deliver. We can fulfill this mission and provide a fair return to our investors. Look, American Water has been doing this work since 1886. That's nearly 140 years. But there's much left to be done. Some may question, and some do still today, the sense of urgency that we exhibit as we execute this investment plan. The sense of urgency is driven by the tremendous need, simply put. We will continue to do this work and deliver the superior returns our investors expect. It is a privilege to lead the 6,500-member team that is committed to and focused on delivering solutions to our customers, and you, our investors, make it possible for this important work to continue. And with that, I'll turn it back to our operator to begin Q&A and take any questions you may have.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Richard Sunderland of JP Morgan. Go ahead, please.

Hi, good morning. Thank you for the time today.

Good morning, Rich.

So we've been getting a lot of questions on the financing plan and hoping you can walk through the $1.5 billion equity increase versus the $1 billion CapEx increase. are there any timing factors to the financing plan driving equity higher than the incremental CapEx, like maybe capturing some of the year's 6 through 10 equity in this current five-year plan?

That's a good question, Rich, and obviously we've seen a lot of commentary on that overnight and this morning as you all have been digesting the new plan here. I think it's as simple as a continued growing investment plan, as you've noted, and our continued focus on this strong balance sheet plan. You know, we take very seriously the strength of the balance sheet and the metrics associated with that, and we've been very transparent on what those are. And we'll continue to finance the plan, the growing plan, to maintain those expectations. I think it's pretty simple to think about it in those terms. The timing, I think, is maybe what's tripping people up a bit, but I think you just need to think about the size of our plan, the long-term nature of our plan, the outlook that we've provided from a long-term perspective here, and our continued focus on that balance sheet. It's all just directly tied to those key objectives we have. And David, John, anything to add from your perspective here? No, I think you've really covered it, Susan.

Yeah, maybe I'll just add one comment, Rich, which is, you know, if we think about the billion-dollar increase in our five-year plan investment plan, Keep in mind that even if we did not increase the five-year plan at all, we would still intend to raise equity in the latter part of the new plan period. We are growing the company 8% to 9% rate-based growth. We generate a lot of internal cash flow. We raise debt, but we'll always be raising equity periodically to fund what we consider to be a robust capital plan. So I'd say the billion-dollar increase in the five-year plan incrementally increased the amount of equity that we will be raising, but we'll always be in the business of periodically raising equity.

No, got it. That's very clear. And maybe I'll pick up on that last point and just unpack that a little bit more. I think if you look at last year's update and then this year's update on the kind of full balance of sources and The cash flow guidance uptick last year was larger than the uptick this year, maybe $2 billion versus one. I'm curious if you could just unpack a little bit more of what's going on there in terms of your assumptions and expectations embedded in that. Are there any factors we should think about the roll forward last year versus the roll forward this year purely on the cash flow guidance?

Okay. Rich, I think one factor that we have incorporated in here would be related to alternative minimum tax as a driver, or we fully expect to be a cash taxpayer starting in 2025.

Yeah, and Rich, I would just add to that that Yeah, as you recall, Rich, when we first accelerated our CapEx plan back in 2021, what we found is that we're investing even more capital than that accelerated plan. And so the enhanced capital investment that we're seeing is generating additional internal cash flow.

Perfect. Very helpful commentary. Thank you. I'll leave it there.

Thanks, Rich.

The next question comes from Durgesh Chopra of Evercore ISI. Go ahead, please.

Hey, team. Good morning. David, congrats. Good morning. Good morning, Susan. Nice job batting the closing remarks here. And David, congrats. I look forward to working with you. Thanks. Yep, yep, absolutely. So, hey, maybe just, guys, get your perspective on the strategy in Pennsylvania. You know, as you kind of roll this plan forward, how are you thinking about CapEx in the state versus previous assumptions? And then the rate case filing strategy in light of the order, just any color you can offer there would be great. Thank you.

Yeah, Rich, probably not a lot to add from our discussion last quarter. You know, as we've continued to emphasize, our capital planning process is really risk-based. We're really looking at where the need is the greatest, and we'll allocate capital first according to that need, and then to the extent there are opportunities to continue to enhance service in those areas, other areas, we'll look at those opportunities. I think that process has continued, and I think you'll continue to see us make significant investment in Pennsylvania. So no change there. And I'd also say, you know, and again, we talked about this last quarter as it relates to our rate case outcome there. While the ROE might have been lower than we had hoped for, we certainly have that built in this plan, and you can see us continue to emphasize strong growth rates year over year. Our 2025 expected growth at 8%. all fully reflected in our plan. So we're moving forward.

That's helpful, Susan. Thank you. And then, David, maybe I could just quickly follow up. You talked about the AMT and being a full cash taxpayer in 2025. Could you help us with what dollar amount of cash payments are you expecting in 2025 and going forward?

Yeah, I think you can think of it In the range of $100 million plus or minus a year and cash taxes paid as part of the AMT.

Awesome. Thanks again.

Thanks, Ragesh.

Again, if you have a question, please press star then 1. Our next question comes from Angie of Seaport. Go ahead, please.

Thank you. So just one somewhat of a random question. So I'm just wondering if you guys are making any plans on any changes in how you procure electricity. I mean, I'm looking at the states where you operate. It seems like you will be exposed to quite an inflation in the cost of electricity? And so are you trying to maybe lock in some of those prices ahead of time? And, you know, are you concerned about, for example, the affordability argument when the electricity prices were to go meaningfully up?

Hey, good morning, Angie. Yeah, good question. And we might have touched on this a little bit, I think, last quarter, but Certainly it's a major focus for us. Electricity costs are a big cost associated with the work that we do. And to that end, we have multiple long-term contracts already in place, I think some as far out as 2029. So we have this risk, I'd say, fairly well mitigated through our current contracting strategy.

Okay, fantastic. Changing topics. So, you know, you've obviously extended your growth rate. I think we're all looking at your earnings power beyond 26, right, when you lose the benefit of interest income. So, I mean, what fills up that, you know, that 10 cents? Is it that you sort of step up the level of spending? Is it that you're hopeful for additional municipal M&A? I'm just wondering, again, how you can bridge the gap.

Yeah, Angie, we certainly have addressed this, I think, a couple of times. I'll ask John to sort of reiterate what our view is here.

Thanks for the question, Angie. You know, as you recall, back in 2021, when we put the note into place, we accelerated our capital plan at that point in time, increasing the five-year plan by a couple of billion dollars at that point. And in the context of another question earlier, what we found is we've not only achieved that, I would say, but more. And we're always injecting equity into our operating companies to generate incremental regulated earnings. And that's really what's driving our ability to replace the interest income from the note. If you think about the interest income from the note, a lot of people look at it on an incremental basis and say, okay, gee, there's effectively 20 cents of earnings going away. And that's from the $720 million note. It's 7% interest that we built into our 7% to 9% guidance forecast back in 2021. You know, what people need to remember is we are bringing in $795 million, which is the original 720 plus the earn-out payment that was rolled into the note. And if you think about that $795 million as interest, that's avoiding incremental capital issuance, whether it's equity or debt. So if you assume that we're avoiding long-term debt with that $795 million, pick a long-term interest rate, 5.5%, whatever you want to make up as a long-term debt interest rate. That offsets that $0.20, not all of it, but it gets you, call it $0.17 or so, and we're really only filling kind of a $0.03 hole there uh, nothing. And so people kind of can't forget about the right side of the page that yes, the interest income is going away, but we, we do have capital that we're avoiding incremental, uh, debt with. Um, I would also note Angie that it's, it's, uh, good for people to keep in mind that the final maturity date on the note is December, 2026, but, uh, the, the, the borrower can call the note, uh, as of December, 2025. And so it, um, We'll see when the note gets taken out, but that's something just to, we could see it earlier than December 2026.

Okay, and then lastly, on the frequency of rate cases. So, you know, again, we're trying to sort of understand what happened with the last rate case in Pennsylvania, and obviously some of it was the frequency of the rate case filings. I'm just wondering... One could argue that, you know, you're filing rate cases more often, not just in Pennsylvania, but in other states, because you really have to hit your allowed ROEs. They realize ROE has to be as close as possible to the allowed. So, I mean, how do you see it in your plan? I mean, are you assuming that, you know, in every jurisdiction, you basically hit that allowed ROE, and that's what drives the earnings growth? What if there is some either slippage in those rate cases or the... you know, a negative outcome of some of them.

Yeah, Angie, on the rate case strategy, and I think we've been trying to make this point for a couple of years now, what really drives our rate case cycling is the need and the investment. You know, we just continue to believe there is such tremendous need to do the work that we're doing, that we've accelerated our capital investment program accordingly. And the more investment we make, the greater the growth in the rate base and the need for timely recovery. Now, we have mechanisms and other approaches that get essentially 75% of that investment recovered, what we would call sort of more timely, you know, through periodic adjustments. But we still have the remaining investment that is subject to traditional regulatory measures. process and the need to get timely recovery of that investment along with the size of the investment is what drives that cycling so you know we don't build a rate case cycle just to hit a rate of return we build it because that's how we're investing and that's what the regulatory process calls for so that's really what's behind the strategy it's the need awesome thank you Thanks, Angie.

This concludes our question and answer session and American Water's third quarter 2024 earnings conference call. Thank you for attending today's presentation. You may now disconnect.